MyHealthguide, www.myhealthguide.com

MyHealthGuide Source: Tom Croft, Esq., King & Croft LLP, 12/13//2010 www.StopLossLaw.com

Case: Diversatek,Inc. v .QBE Ins. Corp. and SLG Benefits and Insurance., LLC, No. 07-C-1036, in the United States District Court for the Eastern District of Wisconsin, 11/30/2010). Court’s Opinion.

Mr. Croft’s Comment: I represent the carrier and MGU in this case, in which proceedings are ongoing. For that reason, my commentary on the case will be brief, and will stick to reporting the holdings of the Court without comment or argument at this time. In other words, my tongue bleeds profusely throughout this write up.

Case Background

A Wisconsin federal court, resurrecting the CADSI (Computer Aided Design Sys. Inc. v. Safeco Life Ins. Co.) doctrine, held that a stop loss carrier had no right to second guess the Plan administrator’s decision as to eligibility, and acted in bad faith as a matter of law in doing so. It further held that, since the MGU was not a party to the stop loss contract, it could not be liable for acting in bad faith.

The group, Diversatek, had a Plan that lacked any “leave of absence” provision, although it did provide for other forms of continuation of coverage, such as FMLA, COBRA, military leave, and layoff. Participant X was a victim of a drive-by shooting and hospitalized for several months. At the time of the shooting Participant X was an employee of Diversatek working the requisite 40 hours per week to maintain his eligibility as a member of the eligible class of employees under the Plan. The Plan defined “employee” as “an active employee of the Company receiving compensation for services rendered to the Company.” The Plan provided for automatic and immediate termination of coverage on the date that an employee ceased to be in a class of participants eligible for coverage.

Diversatek ceased compensating Participant X the day of the shooting, but it kept him on the Plan for several months until it “terminated” him and offered him COBRA, which he then declined. When stop loss claims were submitted for Participant X, the MGU made repeated inquiry as to how his eligibility was being maintained under the Plan. Each time, Diversatek responded that Participant X” was on a leave of absence, although there was no written “leave of absence” provision in the Plan, or anywhere else. The carrier ultimately denied the claims on the grounds that Participant X was not a covered person under the Plan during his hospitalization, and Diversatek sued.

Court’s Response

In a 23 page opinion, the Court first noted the coverage provision in the stop loss policy, which provided for reimbursement upon proof of “Plan Benefits Paid,” which was defined as benefits covered under the Plan; benefits not covered by the Plan were specifically excluded from the definition.

The Court then focused on the language in the stop loss policy stating that determination of benefits under the Plan was the group’s responsibility. (Language to this effect is routinely included to eschew any implication that the carrier makes benefits decisions under the Plan for ERISA purposes). From this, the Court concluded that “whether [Participant X's] medical expenses are plan benefits is Diversatek’s sole responsibility.’”

Next, the Court reviewed the standard language of the Plan itself, granting the administrator sole authority and discretion to determine eligibility and benefits, and used this to buttress its conclusion that Diversatek–and only Diversatek–had the power to decide whether a given claimant was eligible under the Plan. The Court stated:

“A reasonable entity would understand the Policy to prohibit QBE from denying reimbursement based on its determination that [Participant X] was not a covered plan participant as QBE has no right under the Policy to make a benefit determination.

Moreover, a reasonable entity would believe that the claims submitted to QBE for reimbursement were covered as long as Diversatek was complying with documentation requirements.”

The following section of the opinion analogized QBE’s position to that of a Plan beneficiary challenging a benefit determination, invoking the principles espoused in Computer Aided Design Systems, Inc. v. Safeco by an Iowa federal court several years ago. In other words, in order to challenge Diversatek’s eligibility determination, QBE would have to prove the decision was arbitrary and capricious.

Participant was Eligible

Despite the facts that Participant X was not working forty hours per week and was not even an employee because Diversatek was not paying him, the Court concluded that Diversatek’s benefit determination was reasonable. It did so by looking to the enrollment eligibility section of the Plan, which stated:

“A group health plan may not base rules for eligibility for coverage upon an individual being “actively at work,” if a health factor is present.”

The Court concluded that this provision evidenced an intent not to allow and employee’s medical condition to affect his/her eligibility under the Plan, such that Participant X remained covered until his termination several months after his injury.

The Court went on to conclude that the stop loss carrier acted in bad faith by not recognizing these principles and therefore awarded prejudgment interest at 12% and attorneys’ fees to the Plaintiff.

Finally, the Court accepted the MGU’s argument that it was not a party to the stop loss contract, and could not therefore be held liable on the claim or for bad faith.

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This entry was posted by Adam V. Russo on Monday, December 20th, 2010 at 5:34 pm and is filed under Stop Loss. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.